CIMA c2 ELSEVIER Fundamental of Finance Management

CIMA Official
Learning System
Revised edition relevant for
Computer-Based Assessments

C2 — Fundamentals of
Financial Accounting
CIMA Certificate in
Business Accounting
Henry Lunt


CIMA Publishing is an imprint of Elsevier
Linacre House, Jordan Hill, Oxford OX2 8DP, UK
30 Corporate Drive, Suite 400, Burlington, MA 01803, USA
First edition 2008
Copyright © 2009 Elsevier Ltd. All rights reserved
No part of this publication may be reproduced, stored in a retrieval system
or transmitted in any form or by any means electronic, mechanical, photocopying,
recording or otherwise without the prior written permission of the publisher
Permissions may be sought directly from Elsevier’s Science & Technology Rights
Department in Oxford, UK: phone (ϩ44) (0) 1865 843830; fax (ϩ44) (0) 1865 853333;
e-mail: Alternatively you can visit the Science and Technology Books
website at www.elsevierdirect.com/rights for further information
Notice
No responsibility is assumed by the publisher for any injury and/or damage to persons
or property as a matter of products liability, negligence or otherwise, or from any use
or operation of any methods, products, instructions or ideas contained in the material
herein.
British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library
Library of Congress Cataloguing in Publication Data
A catalogue record for this book is available from the Library of Congress
978-1-85617-785-6
For information on all CIMA publications
visit our website at www.elsevierdirect.com
Typeset by Macmillan Publishing Solutions
(www.macmillansolutions.com)
Printed and bound in Italy
09 10 11

11 10 9 8 7 6 5 4 3 2 1

Working together to grow
libraries in developing countries
www.elsevier.com | www.bookaid.org | www.sabre.org


Contents
The CIMA Learning System
How to use your CIMA Learning System
Guide to the Icons used within this text
Study technique
Planning
Tips for effective studying
Computer-Based Assessments
The Fundamentals of Financial Accounting Syllabus

CIMA Certificate in Business Accounting
Syllabus Outline

Learning Aims
Assessment Strategy

1

The Accounting Scene
1.1
1.2
1.3
1.4
1.5

1.6
1.7

1.8

Learning Outcomes
Introduction
What is accounting?
1.2.1 The objectives of accounting
Who uses financial statements?
The qualitative characteristics of financial statements
Terminology
1.5.1 Bookkeeping
1.5.2 Financial accounting
1.5.3 Management accounting
The differences between external and internal information
What is a business organisation?
1.7.1 Profit-making organisations

1.7.2 Non-profit-making organisations
Summary
Revision Questions
Solutions to Revision Questions

2

The Framework of Financial Statements
2.1
2.2
2.3
2.4

Learning Outcomes
Introduction
The separate entity convention
The accounting equation
2.3.1 The accounting equation in action
The accounting equation and the statement of financial position
2.4.1 The contents of a statement of financial position
2.4.2 Vertical presentation of a statement of financial position

xi
xi
xii
xii
xiii
xiv
xiv
xv

xvii
xvii
xvii
xviii
1
3
3
3
4
5
6
7
7
7
7
8
8
9
9
10
11
13
15
17
17
17
18
19
22
22

24


FUNDAMENTALS OF FINANCIAL ACCOUNTING C2

CONTENTS

iv

2.5
2.6
2.7

2.8

The income statement
2.5.1 The cost of goods sold
Profit and cash
Capital and revenue
2.7.1 Capital transactions
2.7.2 Revenue transactions
Summary
Revision Questions
Solutions to Revision Questions

3

The Accounting System in Action
3.1
3.2

3.3
3.4

3.5
3.6

Learning Outcomes
Introduction
What is a ledger account?
What is double-entry bookkeeping?
Bookkeeping entries for expenses and revenue
3.4.1 Bookkeeping entries for purchases and sales
3.4.2 Nominal ledger accounts
Balancing the accounts
3.5.1 Calculating the balance on the account
Summary
Revision Questions
Solutions to Revision Questions

4

Summarising the Ledger Accounts
4.1
4.2

4.3

4.4
4.5
4.6

4.7

Learning Outcomes
Introduction
Preparing the trial balance
4.2.1 Does the trial balance prove the accuracy of the
ledger accounts?
Preparing a statement of profit
4.3.1 The trading account
4.3.2 The income statement
4.3.3 The balance on the income statement
4.3.4 Dealing with drawings
Preparing the statement of financial position
Balancing off the ledger accounts
Columnar ledger accounts
Summary
Revision Questions
Solutions to Revision Questions

5

Further Aspects of Ledger Accounting
5.1
5.2

Learning Outcomes
Introduction
Accounting for specialised transactions

25

27
29
30
30
30
30
31
35
39
41
41
41
42
46
46
50
50
51
52
53
61
67
69
69
69
70
72
72
76
78

79
79
80
85
85
87
93
97
99
99
99


FUNDAMENTALS OF FINANCIAL ACCOUNTING

5.4

5.5
5.6

5.7
5.8

Revision Questions
Solutions to Revision Questions

6

Accounting for Non-current Assets
6.1

6.2
6.3
6.4

6.5
6.6
6.7
6.8
6.9

Learning Outcomes
Introduction
Capital and revenue expenditure
Depreciation
Calculating depreciation
6.4.1 The straight-line method
6.4.2 The reducing-balance method
6.4.3 The machine-hour method/units of production method
6.4.4 The revaluation method
6.4.5 Depreciation in the year of acquisition and disposal
Accounting for the disposal of a non-current asset
A comprehensive example
Controlling tangible non-current assets
Accounting for intangible non-current assets
6.8.1 What is goodwill?
Summary
Revision Questions
Solutions to Revision Questions

7

Preparation of Financial Statements with
Adjustments
7.1
7.2

Learning Outcome
Introduction
The trial balance

99
100
102
106
106
106
107
107
107
109
110
110
112
113
114
115
116
120
122
123

133
141
143
143
143
145
146
147
148
149
149
150
150
152
154
155
156
157
159
177

189
191
191
191

CONTENTS

5.3

5.2.1 Carriage costs
5.2.2 Discounts
Accounting for sales tax
5.3.1 Sales tax on non-current assets and expenses
5.3.2 Sales tax in separate ledger accounts
5.3.3 Non-registered businesses
5.3.4 Zero-rated and exempt supplies
Accounting for wages and salaries
5.4.1 Gross pay and net pay
5.4.2 Other deductions
5.4.3 Pension contributions
Accruals and prepayments
5.5.1 Recording accruals and prepayments in the ledger accounts
Bad debts and allowance for receivables
5.6.1 Accounting for bad debts
5.6.2 Bad debts recovered
5.6.3 Allowance for receivables
The exchange of goods
Summary

v


FUNDAMENTALS OF FINANCIAL ACCOUNTING C2

CONTENTS

vi

7.3

7.4
7.5
7.6
7.7

The adjustments
Step1: Labelling the trial balance
Step2: Preparing workings
Step3: Preparing the financial statements
Summary
Revision Questions
Solutions to Revision Questions

8

Organising the Bookkeeping System
8.1
8.2
8.3
8.4

8.5

8.6

8.7

8.8

Learning Outcomes

Introduction
Organising the ledger accounts
8.2.1 Advantages of dividing the ledger
Supporting books and records
8.3.1 Source documents
Sales, purchases and returns daybooks
8.4.1 Recording transactions in the daybooks
8.4.2 Making the ledger entries
8.4.3 Extending the use of daybooks
The cash books
8.5.1 The banking system
8.5.2 The cash book
8.5.3 The petty cash book
The journal
8.6.1 The layout of the journal
8.6.2 Using the journal for miscellaneous transactions
8.6.3 Using the journal for end-of-year transactions
Inventory records and methods of inventory measurement
8.7.1 The process of inventories measurement
8.7.2 Application of methods of inventory measurement
(also known as cost formulas)
8.7.3 Issues and receipts
Summary
Revision Questions
Solutions to Revision Questions

9

Controlling the Bookkeeping System
9.1

9.2

9.3

Learning Outcomes
Introduction
Preventing errors
9.2.1 Authorisation procedures
9.2.2 Documentation
9.2.3 Organisation of staff
9.2.4 Safeguarding assets
Detecting errors
9.3.1 Spot checks
9.3.2 Comparison with external evidence

192
193
194
196
205
207
219
229
231
231
232
232
232
233
233

234
235
240
241
241
242
245
246
247
247
248
249
251
252
255
257
259
269
277
279
279
279
280
280
280
281
281
281
281

FUNDAMENTALS OF FINANCIAL ACCOUNTING

9.7
9.8
9.9
9.10

Revision Questions
Solutions to Revision Questions

10 The Regulatory Framework of Accounting
10.1
10.2

10.3
10.4

10.5

Learning Outcomes
Introduction
Accounting conventions
10.2.1 The business entity convention
10.2.2 The money measurement convention
10.2.3 The historical cost convention
10.2.4 The objectivity convention
10.2.5 The dual aspect convention
10.2.6 The realisation convention
10.2.7 The periodicity convention

10.2.8 The accruals and matching conventions
10.2.9 The materiality convention
10.2.10 The stable monetary unit convention
10.2.11 The going concern convention
10.2.12 The consistency convention
10.2.13 The prudence convention
Accounting policies and estimation techniques
The historical cost convention and its alternatives
10.4.1 The theory of capital maintenance
10.4.2 Current purchasing power (CPP) accounting
10.4.3 Current cost accounting
10.4.4 Fair value
10.4.5 Value to the business (or deprival value)
10.4.6 The valuation of intangible assets
Regulations in accounting
10.5.1 Company law
10.5.2 The accountancy profession

281
282
282
285
287
290
293
294
295
295
295
296

299
300
300
302
303
317
327
329
329
330
330
330
331
331
331
331
332
332
333
334
334
334
334
335
336
337
337
338
338
338

339
342
342
342

CONTENTS

9.4
9.5
9.6

9.3.3
Reconciliations
9.3.4
Carrying out an audit
Bank reconciliation statements
Reconciliation of suppliers’ statements
Control accounts
9.6.1
The status of the control account
9.6.2
Contra entries
9.6.3
Credit balances in the sales ledger; debit balances in
the purchase ledger
9.6.4
The control account and allowance for receivables
9.6.5
Advantages of control accounts
9.6.6

Reconciling control accounts and ledger accounts
Suspense accounts and the correction of errors
Computers in accounting
9.8.1
Aspects of computerised accounting systems
Accounting coding systems
Summary

vii


FUNDAMENTALS OF FINANCIAL ACCOUNTING C2

CONTENTS

viii

10.6

10.7
10.8

10.5.3 International accounting standards
10.5.4 The IASB Framework for the Preparation and
Presentation of Financial Statements (the ‘Framework’)
The role of the auditor
10.6.1 Fair presentation or true and fair
10.6.2 The role of the external auditor
10.6.3 The role of the internal auditor
10.6.4 The value-for-money audit

The role of management
Summary
Revision Questions
Solutions to Revision Questions

11

Incomplete Records; Income and
Expenditure Statements
11.1
11.2

11.3

11.4

Learning Outcomes
Introduction
Calculating ‘missing figures’
11.2.1 Sales figures
11.2.2 Purchases figures
11.2.3 Expenses figures
11.2.4 Opening capital
11.2.5 Cash and bank summaries
Financial statements of non-profit-making bodies
11.3.1 Accounting terminology for non-profit-making bodies
11.3.2 Accounting for membership fees and subscriptions
11.3.3 The financial statements of non-trading organisations
Summary
Revision Questions

Solutions to Revision Questions

12

The Manufacturing Account
12.1
12.2
12.3

12.4
12.5
12.6

Learning Outcomes
Introduction
Why is a manufacturing account needed?
12.2.1 Inventories in manufacturing organisations
Costs to include in the manufacturing account
12.3.1 Other direct costs
12.3.2 Prime cost
12.3.3 Indirect costs
12.3.4 Factory cost of production
12.3.5 Work in progress
12.3.6 Factory cost of goods completed
Layout of manufacturing and trading accounts
Income statement for manufacturing organisations
Statements of financial position for manufacturing organisations

342
344

344
345
346
347
347
347
348
349
357

361
363
363
364
364
365
365
366
366
373
373
374
376
381
383
399
411
413
413
413

414
414
415
415
415
415
415
416
416
417
417


FUNDAMENTALS OF FINANCIAL ACCOUNTING

The accounting system for manufacturing organisations
Summary
Revision Questions
Solutions to Revision Questions

13

The Financial Statements of Limited
Companies and the Statement of Cash Flows
13.1
13.2

13.3

13.4

Learning Outcomes
Introduction
Limited companies
13.2.1 The financial statements of companies
13.2.2 Presentation of company income statements
13.2.3 Taxation in company financial statements
13.2.4 Directors of limited companies
13.2.5 Sources of finance for a limited company
13.2.6 Dividends
13.2.7 Reserves
13.2.8 Statement of comprehensive income
13.2.9 Statement of changes in equity
Statement of cash flows
13.3.1 What is a statement of cash flows?
13.3.2 Why does the profit earned not equal the change in
bank and cash balances?
13.3.3 Cash flows from operating activities – cash generated
from operations
13.3.4 Cash flows from operating activities – net cash from
operating activities
13.3.5 Cash flows from investing activities
13.3.6 Cash flows from financing activities
13.3.7 Statement of cash flows for sole traders
Summary
Revision Questions
Solutions to Revision Questions

14

The Interpretation of Financial Statements
14.1
14.2
14.3
14.4
14.5

Learning Outcomes
Introduction
What is meant by ‘interpretation of financial statements’?
Calculating ratios
14.3.1 Using the ratios
Types of ratios
Profitability ratios
14.5.1 Gross profit margin
14.5.2 Gross profit mark-up
14.5.3 Operating profit margin
14.5.4 Return on capital ratios

417
420
423
427

429
431
431
432
432
433

433
434
434
436
437
438
440
447
447
447
448
450
450
450
453
454
455
483
501
503
503
503
505
505
505
506
507
507
508
508

CONTENTS

12.7
12.8

ix


CONTENTS

x

FUNDAMENTALS OF FINANCIAL ACCOUNTING C2

14.6

Liquidity ratios
14.6.1 The current ratio
14.6.2 The quick ratio
14.7 Efficiency ratios
14.7.1 Asset turnover ratios
14.7.2 Inventories days
14.7.3 Receivables days
14.7.4 Payable days
14.7.5 Total working capital ratio
14.8 Capital structure ratios
14.8.1 The gearing ratio (or leverage ratio)
14.8.2 Interest cover
14.9 Ratio analysis for sole traders

14.10 Summary
Revision Questions
Solutions to Revision Questions

Preparing for the Computer-Based
Assessments (CBAs)
Revision technique
Planning
Getting down to work
Tips for the final revision phase
Format of the Assessment
Structure of the assessment
Weighting of subjects
Revision Questions
Solutions to Revision Questions

510
510
510
511
511
511
513
513
513
514
514
515
515
515

517
539

553
555
555
556
556
556
556
557
559
639

Mock Assessment 1

681

Mock Assessment 2

707

Index

731


The CIMA
Learning System

How to use your CIMA Learning System
This Financial Accounting Fundamentals Learning System has been devised as a resource for
students attempting to pass their CIMA computer-based assessments, and provides:
●
●
●
●

a detailed explanation of all syllabus areas;
extensive ‘practical’ materials;
generous question practice, together with full solutions;
a computer-based assessments preparation section, complete with computer-based
assessments standard questions and solutions.

This Learning System has been designed with the needs of home-study and distancelearning candidates in mind. Such students require very full coverage of the syllabus
topics, and also the facility to undertake extensive question practice. However, the
Learning System is also ideal for fully taught courses.
The main body of the text is divided into a number of chapters, each of which is organised on the following pattern:
●

●

●

●

Detailed learning outcomes. This is expected after your studies of the chapter are complete. You should assimilate these before beginning detailed work on the chapter, so that
you can appreciate where your studies are leading.
Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory text supported where appropriate by worked examples and exercises. You should
work carefully through this section, ensuring that you understand the material being

explained and can tackle the examples and exercises successfully. Remember that in
many cases knowledge is cumulative: if you fail to digest earlier material thoroughly, you
may struggle to understand later chapters.
Activities. Some chapters are illustrated by more practical elements, such as comments
and questions designed to stimulate discussion.
Question practice. The test of how well you have learned the material is your ability to
tackle exam-standard questions. Make a serious attempt at producing your own answers,
but at this stage do not be too concerned about attempting the questions in computerbased assessments conditions. In particular, it is more important to absorb the material thoroughly by completing a full solution than to observe the time limits that would
apply in the actual computer-based assessments.
xi


THE CIMA LEARNING SYSTEM

xii

FUNDAMENTALS OF FINANCIAL ACCOUNTING C2

Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion
to think that this provides the same benefits as you would gain from a serious attempt
of your own. However, if you are struggling to get started on a question you should read
the introductory guidance provided at the beginning of the solution, where provided,
and then make your own attempt before referring back to the full solution.
Having worked through the chapters you are ready to begin your final preparations for the
computer-based assessments. The final section of this CIMA Learning System provides you
with the guidance you need. It includes the following features:
●

●
●

●
●

●

●

A brief guide to revision technique.
A note on the format of the computer-based assessments. You should know what to
expect when you tackle the real computer-based assessments and in particular the
number of questions to attempt.
Guidance on how to tackle the computer-based assessments itself.
A table mapping revision questions to the syllabus learning outcomes allowing you to
quickly identify questions by subject area.
Revision questions. These are of computer-based assessments standard and should be tackled in computer-based assessments conditions, especially as regards the time allocation.
Solutions to the revision questions.

Two mock computer-based assessments. You should plan to attempt these just before the
date of the real computer-based assessments. By this stage your revision should be complete
and you should be able to attempt the mock computer-based assessments within the time
constraints of the real computer-based assessments.
If you work conscientiously through this CIMA Learning System according to the guidelines above you will be giving yourself an excellent chance of success in your computerbased assessments. Good luck with your studies!

Guide to the Icons used within this Text
Key term or definition
Exam tip or topic likely to appear in the computer-based assessments
Exercise
Question
Solution

Comment or Note

Study technique
Passing exams is partly a matter of intellectual ability, but however accomplished you are in
that respect you can improve your chances significantly by the use of appropriate study and
revision techniques. In this section we briefly outline some tips for effective study during


FUNDAMENTALS OF FINANCIAL ACCOUNTING

Planning
To begin with, formal planning is essential to get the best return from the time you
spend studying. Estimate how much time in total you are going to need for each paper
you are studying for the Certificate in Business Accounting. Remember that you need to
allow time for revision as well as for initial study of the material. The amount of notional
study time for any paper is the minimum estimated time that students will need to
achieve the specified learning outcomes set out below. This time includes all appropriate learning activities, for example, face-to-face tuition, private study, directed home
study, learning in the workplace, revision time, and so on. You may find it helpful to
read Better Exam Results: A Guide for Business and Accounting Students by Sam Malone,
Elsevier, ISBN: 075066357X. This book will provide you with proven study techniques.
Chapter by chapter it covers the building blocks of successful learning and examination
techniques.
The notional study time for the Certificate in Business Accounting paper
Fundamentals of Financial Accounting is 130 hours. Note that the standard amount
of notional learning hours attributed to one full-time academic year of approximately 30
weeks is 1,200 hours.
By way of example, the notional study time might be made up as follows:
Hours
Face-to-face study: upto
Personal study: upto

‘Other’ study – e.g. learning in the workplace, revision, and so on: up to

40
65
25
130

Note that all study and learning-time recommendations should be used only as a guideline and are intended as minimum amounts. The amount of time recommended for faceto-face tuition, personal study and/or additional learning will vary according to the type of
course undertaken, prior learning of the student, and the pace at which different students
learn.
Now split your total time requirement over the weeks between now and the exam. This
will give you an idea of how much time you need to devote to study each week. Remember
to allow for holidays or other periods during which you will not be able to study (e.g.
because of seasonal workloads).
With your study material before you, decide which chapters you are going to study in
each week, and which weeks you will devote to revision and final question practice.
Prepare a written schedule summarising the above – and stick to it!
The amount of space allocated to a topic in the Learning System is not a very good
guide as to how long it will take you. For example, the material relating to the ‘Conceptual
and Regulatory Framework’ and the ‘Accounting Systems’ both account for 20 per cent
of the syllabus, but the latter has more pages because there are more numerical illustrations which take up more space. The syllabus weighting is the better guide as to how long
you should spend on a syllabus topic. It is essential to know your syllabus. As your course

THE CIMA LEARNING SYSTEM

the earlier stages of your approach to the computer-based assessments. Later in the text we
mention some techniques that you will find useful at the revision stage.

xiii

THE CIMA LEARNING SYSTEM

xiv

FUNDAMENTALS OF FINANCIAL ACCOUNTING C2

progresses you will become more familiar with how long it takes to cover topics in sufficient depth. Your timetable may need to be adapted to allocate enough time for the whole
syllabus.

Tips for effective studying
1. Aim to find a quiet and undisturbed location for your study, and plan as far as possible
to use the same period of time each day. Getting into a routine helps to avoid wasting time. Make sure that you have all the materials you need before you begin so as to
minimise interruptions.
2. Store all your materials in one place, so that you do not waste time searching for items
around your accommodation. If you have to pack everything away after each study period,
keep them in a box, or even a suitcase, which will not be disturbed until the next time.
3. Limit distractions. To make the most effective use of your study periods you should
be able to apply total concentration, so turn off all entertainment equipment, set your
phones to message mode, and put up your ‘do not disturb’ sign.
4. Your timetable will tell you which topic to study. However, before diving in and becoming engrossed in the finer points, make sure you have an overall picture of all the areas
that need to be covered by the end of that session. After an hour, allow yourself a short
break and move away from your Learning System. With experience, you will learn to
assess the pace you need to work at.
5. Work carefully through a chapter, making notes as you go. When you have covered a
suitable amount of material, vary the pattern by attempting a practice question. When
you have finished your attempt, make notes of any mistakes you made, or any areas
that you failed to cover or covered only skimpily.
6. Make notes as you study, and discover the techniques that work best for you. Your
notes may be in the form of lists, bullet points, diagrams, summaries, ‘mind maps’ or

the written word, but remember that you will need to refer back to them at a later date,
so they must be intelligible. If you are on a taught course, make sure you highlight any
issues you would like to follow up with your lecturer.
7. Organise your paperwork. Make sure that all your notes, calculations and articles can
be effectively filed and easily retrieved later.

Computer-Based Assessments
CIMA uses objective test questions in the computer-based assessments. The most common
types are:
●

●

●

●

●

Multiple choice, where you have to choose the correct answer from a list of four possible
answers. This could either be numbers or text.
Multiple choice with more choices and answers, for example, choosing two correct
answers from a list of eight possible answers. This could either be numbers or text.
Single numeric entry, where you give your numeric answer, for example, profit is
$10,000.
Multiple entry, where you give several numeric answers, for example, the charge for electricity is $2,000 and the accrual is $200.
True/false questions, where you state whether a statement is true or false, for example,
external auditors report to the directors is FALSE.

FUNDAMENTALS OF FINANCIAL ACCOUNTING

●

Matching pairs of text, for example, the convention ‘prudence’ would be matched with
the statement ‘inventories revalued at the lower of cost and net realisable value’.
Other types could be matching text with graphs and labelling graphs/diagrams.

In every chapter of this Learning System we have introduced these types of questions.
For convenience we have retained quite a lot of questions where an initial scenario leads to
a number of sub-questions.

The Fundamentals of Financial Accounting
Syllabus
The computer-based assessments for Financial Accounting Fundamentals is a 2-hour
computer-based assessments comprising 50 compulsory questions, with one or more parts.
There will be no choice and all questions should be attempted if time permits. CIMA are
continuously developing the question styles within the CBA system and you are advised to
try the online website demo at www.cimaglobal.com, to both gain familiarity with assessment software and examine the latest style of questions being used.
CIMA publishing have also developed eSuccess CD’s specifically for Exam Practice.
These can be bought from .

THE CIMA LEARNING SYSTEM

●

xv


This page intentionally left blank

CIMA Certificate in Business
Accounting
Syllabus Outline
The syllabus comprises:
Topic and Study Weighting
A
B
C
D

Conceptual and Regulatory Framework
Accounting Systems
Control of Accounting Systems
Preparation of Accounts for Single Entities

20%
20%
15%
45%

Learning Aims
This syllabus aims to test the student’s ability to:
●
●
●
●

explain the conceptual and regulatory framework of accounting;

explain the nature of accounting systems and understand the control of such systems;
prepare and interpret accounts for a single entity;
calculate and interpret simple ratios.

Note:
This syllabus deals with the recording of accounting transactions and the preparation of
accounting statements for single entities. Students will be required to be aware of the format
and content of published accounts but are not required to prepare them. No knowledge
of any specific accounting treatment contained in the International Financial Reporting
Standards (IFRSs) – including the International Accounting Standards (IASs) – is necessary, except in terms of how they influence the presentation of financial statements. IAS 1
and IAS 7 formats will form the basis of those statements. The terminology used for all
entities will be that seen in the IFRSs. This will enable students to use a consistent set of
accounting terms throughout their studies.
Author’s Note:
IAS 1 has been revised and the new terminology and presentation of financial statements
will be assessable from May 2010. These changes mainly affect Chapter 13 ‘The Financial
Statements of Limited Companies and Statement of Cash Flows’. A change, however,
which does affect all of the Learning System is that a ‘Balance Sheet’ will be called a
‘Statement of Financial Position’ in the computer-based assessment from May 2010. The
term ‘statement of financial position’ is used throughout the Learning System.
xvii


CIMA CERTIFICATE IN BUSINESS ACCOUNTING

xviii

FUNDAMENTALS OF FINANCIAL ACCOUNTING C2

Students who are taking the computer based assessment before May 2010 may also use

this book, but they should note the following differences between the old and revised versions of IAS 1.
IAS 1

Revised IAS 1

CBA Before May 2010

CBA from May 2010

The gain is entered in the
statement of changes in equity,
and appears on its own separate
line. The gain appears under the
heading ‘revaluation reserve’.

The balance sheet is renamed ‘Statement
of financial position’
The cash flow statement has been renamed
‘Statement of cash flows’
In the accounts of limited companies,
this has been renamed ‘Statement of
comprehensive income’
The gain is included in the statement of
comprehensive income, in the section
‘other comprehensive income’.
Total comprehensive income is transferred
to the statement of changes in equity,
and the gain on property revaluation is
analysed under the heading ‘revaluation
reserve’

See Chapter 13

See Chapter 13.

1

Terminology

Balance sheet

2

Terminology

Cash flow statement

3

Terminology

Income statement

4

Gains on the
revaluation of
property.

The gain does NOT appear in the

income statement.

Assessment Strategy
There will be a computer-based assessments of 2 hours duration, comprising 50 compulsory questions, each with one or more parts.
A variety of objective test question types and styles will be used within the assessment.
A Conceptual and Regulatory Framework – 20%
Learning Outcomes
On completion of their studies students should be able to:
(i) identify the various user groups which need accounting information and the qualitative characteristics of financial statements;
(ii) explain the function of, and differences between, financial and management accounting systems;
(iii) identify the underlying assumptions, policies and changes in accounting estimates;
(iv) explain and distinguish capital and revenue, cash and profit, income and expenditure, assets and liabilities;
(v) distinguish between tangible and intangible assets;
(vi) explain the historical cost convention;
(vii) identify the basic methods of valuing assets on current cost, fair value and value in
use bases, and their impact on profit measures and statement of financial position
(previously known as a balance sheet) values;
(viii) explain the influence of legislation (e.g. Companies Acts, EC directives) and accounting
standards on the production of published accounting information for organisations.


FUNDAMENTALS OF FINANCIAL ACCOUNTING

●

●

●
●
●

●

Users of accounts and the qualitative characteristics of financial statements; functions of
financial and management accounts; purpose of accounting statements; stewardship; the
accounting equation.
Underlying assumptions, policies and changes in accounting estimates, capital and revenue, cash and profit, income and expenditure, assets and liabilities.
Tangible and intangible assets.
Historical cost convention.
Methods of asset valuation and their implications for profit measurement and the statement of financial position.
The regulatory influence of company law and accounting standards; items in formats for
published accounts.

B Accounting Systems – 20%
Learning Outcomes
On completion of their studies students should be able to:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)

explain the purpose of accounting records and their role in the accounting system;
prepare cash and bank accounts, and bank reconciliation statements;
prepare petty cash statements under an imprest system;
prepare accounts for sales and purchases, including personal accounts and control
accounts;

explain the necessity for financial accounting codes and construct a simple coding
system;
prepare nominal ledger accounts, journal entries and a trial balance;
prepare accounts for indirect taxes;
prepare accounts for payroll.

Indicative Syllabus Content
●
●
●

●
●
●
●
●
●

The accounting system and accounting records.
Ledger accounts; double-entry bookkeeping.
Preparation of accounts for cash and bank, bank reconciliations, imprest system for petty
cash.
Accounting for sales and purchases, including personal accounts and control accounts.
Financial accounting codes and their uses.
Nominal ledger accounting, journal entries.
Trial balance.
Accounting for indirect taxes, for example value added tax (VAT).
Accounting for payroll.

C Control of Accounting Systems – 15%

Learning Outcomes
On completion of their studies students should be able to:
(i) identify the requirements for external audit and the basic processes undertaken;
(ii) explain the purpose and basic procedures of internal audit;
(iii) explain the meaning of fair presentation;

CIMA CERTIFICATE IN BUSINESS ACCOUNTING

Indicative Syllabus Content

xix


CIMA CERTIFICATE IN BUSINESS ACCOUNTING

xx

FUNDAMENTALS OF FINANCIAL ACCOUNTING C2

(iv)
(v)
(vi)
(vii)

explain the need for financial controls;
explain the purpose of audit checks and audit trails;
explain the nature of errors, and be able to make accounting entries for them;
explain the nature of fraud and basic methods of fraud prevention.

Indicative Syllabus Content

●
●
●
●

External audit and the meaning of fair presentation.
Internal audit.
Financial controls, audit checks on financial controls, audit trails.
Errors and fraud.

D Preparation of Accounts for Single Entities – 45%
Learning Outcomes
On completion of their studies students should be able to:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)

prepare accounts using accruals and prepayments;
explain the difference between bad debts and allowances for receivables;
prepare accounts for bad debts and allowances for receivables;

calculate depreciation;
prepare accounts using each method of depreciation and for impairment values;
prepare a non-current asset register;
prepare accounts for inventories;
prepare income statements, statement of changes in equity and statements of financial position from trial balance;
prepare manufacturing accounts;
prepare income and expenditure accounts;
prepare accounts from incomplete records;
interpret basic ratios;
prepare statements of cash flows (previously known as a cash flow statement).

Indicative Syllabus Content
●
●
●

●
●

●

●
●
●
●

●

Adjustments to the trial balance; accruals and prepayments.
Bad debts and allowance for receivables.

Accounting treatment for depreciation (straight line, reducing balance and revaluation
methods) and impairment.
Non-current asset register.
Accounting for inventories (excluding construction contracts); methods of inventory
measurement (FIFO, LIFO and average cost).
Income statements and statements of financial position from trial balance; statement of
changes in equity.
Manufacturing accounts.
Income and expenditure accounts.
Production of accounting statements from incomplete data.
Ratios: return on capital employed; gross and net profit margins; asset turnover; trade
receivables collection period and trade payables payment period; current and quick
ratios; inventory turnover; gearing.
Statement of cash flows.


1
The Accounting Scene


This page intentionally left blank


The Accounting Scene

1

LEARNING OUTCOMES
When you have completed this chapter, you should be able to:
᭤

identify the various user groups who need accounting information and the qualitative
characteristics of financial statements;

᭤

explain the function of, and differences between, financial and management
accounting systems.

1.1

Introduction

This chapter provides an introduction to the accounting framework and introduces the
function of accounting systems. Much of the chapter relates to the first syllabus area ‘conceptual and regulatory framework’, which is also continued in Chapter 10. This chapter
covers the objectives of accounting, an essential feature of which is a discussion of who
uses accounts. This raises the question of how we can measure the usefulness of accounting
information to those who use accounts.

1.2

What is accounting?

Accounting can be described as being concerned with measurement and management.
Measurement is largely concerned with the recording of past data, and management with
the use of that data in order to make decisions that will benefit the organisation.
The measurement process is not always easy. One of the most common problems is that
of when to recognise a transaction. For example, if we are to obtain goods from a supplier
with payment to be due 60 days after the goods are received, when should the transaction
be recorded?

The following possibilities may be considered:
●
●

when we place the order;
when we take delivery of the goods;
3


THE ACCOUNTING SCENE

4

STUDY MATERIAL C2
●
●

when we receive the invoice from the supplier; or
when we pay the supplier for the goods.

Accounting, therefore, involves the exercising of judgement by the person responsible for
converting data into meaningful information. It is this that distinguishes accounting from
bookkeeping.
Accounting may be defined as:
●
●

●

the classification and recording of monetary transactions;

the presentation and interpretation of the results of those transactions in order to assess
performance over a period and the financial position at a given date;
the monetary projection of future activities arising from the alternative planned courses
of action.

Note the three aspects considered in this definition: recording, reporting and forecasting:
1. Accounting is partly a matter of record-keeping. The monetary transactions entered
into by a business need to be controlled and monitored, and for this a permanent
record is essential. For an efficient system of record-keeping, the transactions must first
be classified into categories appropriate to the enterprise concerned.
2. At appropriate intervals, the individual transactions must be summarised in order to
give an overall picture.
3. Finally, accounting information can be the basis for planning and decision-making.
An alternative explanation is that accounting is part of the management information system (MIS) of an organisation. In this context, the accounting element is referred to as an
accounting information system (AIS).
Accounting can thus be said to be a method of providing information to management
(and other users) relating to the activities of an organisation. In order to do this it relies on
the accurate collection of data from sources both internal and external to the organisation.
The recording of this data is often referred to as bookkeeping.

1.2.1 The objectives of accounting
The objectives of accounting are to provide financial information to the managers, owners
and other parties interested in an organisation. This is done by the production of financial
statements. You will see in Chapter 10 that the International Accounting Standards Board
(IASB) in their Framework for the Preparation and Presentation of Financial Statements
(Framework) state that
Providing useful information to investors is the main objective of financial
reporting.
If these objectives are to be achieved, then the information provided by the accounting system must be reliable and easily understood, and prepared consistently not only from one
accounting period to the next but also between similar organisations so that meaningful

comparisons may be made. This need for consistency has led to a number of accounting
rules being devised. Some of these rules are contained in legislation – these rules apply particularly to companies: some are included in accounting standards; some are included in
documents such as the IASB’s Framework; and others simply represent generally accepted